The U.S. equity market continued its recovery, and some indices pushed to new all-time highs – Nasdaq being one of them. With the coronavirus pandemic still ongoing and most of the world’s developed economies functioning well below their capacity, is the rise in equities justified?
As it turned out, not only the U.S. stock market is higher, but global equity markets enjoyed a rally difficult to imagine only a couple of months ago. According to data published by Topdown Charts and Revinitiv Datastream, over 74% of the stock markets analyzed are in bullish territory. The technical definition of a bull market is a 20% rise from the previous year’s low – 52 out of 70 countries are in a bullish market.
Is There More Room to Go?
What is interesting is that the global equities markets see a tremendous inflow from the bond market. Investors seem to favor equities more than bonds, and many investors are still underweight on their stock market investing.
The retail trading activity surged dramatically too. One explanation comes from the sports betting industry. A huge industry in terms of participants, it shut down with the coronavirus pandemic. The stock market, suddenly, is an interesting place to be, and retail traders picked everything – from risky investments (e.g., airlines, cruise lines), to even bankrupt companies (e.g., Hertz).
Robinhood, a popular online broker in the United States and the United Kingdom, is often quoted as witnessing a massive surge in activity – and it addresses 100% to the retail trader. Are the retail traders right, or is this just another bubble poised to burst anytime soon?
One chart says there is more room to go. When compared to the world’s financial assets, the global liquidity denominated in the world’s reserve currency, the USD, rose dramatically as a consequence of the COVID-19 measures taken by central banks and governments.
Last time when such a thing happened, the world found out about the Plaza Accord. What followed was a massive depreciation for the USD and a global rally in equities. If that is the case, the move higher in equities just started.
On the other hand, all seasoned investors are flashing warning signs about the stock market bubble. Valuations are too high, fundamentals make no sense, and companies trade at illogical earnings multiples. One company, Nikola, in the United States, exceeded Ford’s market capitalization, although Ford sold five million cars in the last twelve months, while Nikola sold none.
Both bulls and bears have solid arguments for the next market move. Who will win in the end?